Income for Life

Coming your way

Posted by Rob Minton
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Income for Life Members, if you haven't yet received your December Members-Only Newsletter, it's on the way, so make sure you keep your eyes open for this jam-packed issue.

After getting some feedback from a member, this month's newsletter focuses on being a real estate investor in a rough economy. You'll get ideas for renting your vacant home, acquiring investments when lending is tight and how you can use the first-time home buyers tax credit to your advantage.

Also coming your way:

• Rob's World -- a little perspective during a time of thanks
• Million-Dollar Thinking by Dan Kennedy
• Don't bet on Big Banks Ruling the Recovery
• Real Estate around North America
• Is Nicolas Cage "Leaving Las Vegas?"
• "Have a Little Faith"
• And More

Not an Income for Life member yet? Visit www.IFLapplication.com to fix that.

Did anybody expect this?

Posted by Rob Minton
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The National Association of Realtors yesterday released statistics for sales of existing homes in October, and, holy cow, the numbers are incredible.

Sales spiked more than 10 percent from September and more than 23 percent from October of last year. With 6.1 million units sold, October was the highest month for sales since February of 2007, nearly three years ago.

According to Thompson Reuters, ecomists expected only 5.65 million units to sell. So sales beat the forecast by nearly a half-a-million homes.

The obvious factor in the big jump is the federal government's first-time home buyer tax credit, which was orginally set to expire at the end of November. In October, nobody really knew if it was going to be extended (it eventually was, to June of next year).

NAR Chief Economist Lawrence Yun, no stranger to optimism when it comes to the housing market, was surprised at October's numbers.

“Many buyers have been rushing to beat the deadline for the first-time buyer tax credit that was scheduled to expire at the end of this month, and similarly robust sales may be occurring in November,” he said in a statement released by the NAR. “With such a sale spike, a measurable decline should be anticipated in December and early next year before another surge in spring and early summer.”

But you have to think that the tax credit isn't the only reason houses are selling again. Interest rates are really, really low, and home prices in many areas continue to fall. So home ownership is more affordable, whether you get the government's tax credit or not.

So while Yun's suggestion that there will be a kind of "winter break" in home sales is probably correct, it might not be a great idea to hibernate all winter. The government will eventually stop propping up the housing market, which will not only mean the end of the tax credits but also the downward pressure on interest rates for home loans. Some experts predict this could occur as early as next spring.

Also keep prices in mind if you're considering a home purchase, either as your primary residence or as an investment. October's big month pushed the national inventory of homes on the market down to seven months' worth -- not nearly as big a stock of homes as were on the market just six months earlier.

And though the national median price dropped again in October -- to $173,100 -- the rate at which prices is falling continues to decline. With a shrinking inventory and theoretically more buyers in the market come next spring, prices could start to rise.

“With the abnormal drop in home prices over the past few years, the price-to-income ratio has fallen below the historic trend line,” Yun said in the NAR release. “This is adding to the buying power of the typical family, with affordability conditions this year at the highest on record dating back to 1970, but prices are beginning to flatten and are poised to rise next year.”

 In other words, it won't pay to wait.

Homeowner confidence is all over the map

Posted by Rob Minton
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Zillow.com, a real estate website, has released its quarterly Homeowner Confidence Survey results for the third quarter of this year. As you can probably guess, homeowners across the country are a bit unsure about the value of their homes.

The survey, which Zillow does each quarter, tracks what homeowners believe about their home's value vs. what actual home values are in their region. The latest survey, conducted from Oct. 6 to Oct. 8  showed that:

• 25 percent of U.S. homeowners believe the value of their home increased
• 26 percent believe their home's value has stayed the same
• 49 percent believe their home's value decreased

According to Zillow, about 72 percent of homes actually decreased in value, while roughly 22 percent of all homes increased in value over the third quarter. The percentage of homes that decreased was quite an improvement from Quarter 2, which saw about 83 percent of homes drop.

Interestingly enough, what the site calls its "Misperception Index" -- the difference between what homeowners believe their house is worth vs. the home's real value -- shrunk in Q3. A value of zero would mean that homeowners' perceived value would be equal to real value.

In Q3, this index was at 10, three points better than the index of 13 in Q2 of this year, and seven points off the index value of 17 in the same third quarter of 2008. In other words, even though homeowners are still a little misguided regarding their home's value, the picture is apparently getting clearer to them.

The survey also found that the confusion isn't just with homeowners who think the value of their home is higher than it is. For example, 20 percent of homeowners in the Northeast responded that they believe their homes increased in value, while Zillow estimates that in reality about 31 percent of homes increased in value.

In contrast, homeowners in the West are the most likely to believe their home is worth more than it is. About 53 percent said their home decreased in value over the past year, while Zillow puts the actual number at 78 percent.

The survey also polled homeowners about where they see home values going in the next six months. A whopping 84 percent of homeowners thought their home's value was done dropping. In the next six months, 41 percent think their home's value will increase, while only 17 percent see it decreasing. About 43 percent think the value will remain the same.

Midwesterners were the most likely to respond that their home would increase in value over the next six months, but they were also the most likely to respond that their home's value would drop. With all that's going on with the housing markets around the country, can you blame them for the confusion?

Only time will tell what's in store for home values. The government's tax credits are helping lure buyers to the market, but impending foreclosures that are likely to hit the market could be the increased supply that offsets that demand.

Stay tuned.

Joe Six-Pack's house is doing just fine

Posted by Rob Minton
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It seems times have been tough for "Joe Six-Pack" during this recession in the United States, but Joe apparently has done better than some of the wine-and-cheese types in at least one area.

His house.

Maybe you missed it -- heck, the doom-and-gloom media let these types of reports fly under the radar often -- but there was a CNN/Money.com article with the headline "What Housing Bust?" that paints a much different picture of real estate in America than you're probably used to reading.

The article points to an analysis done by financial data firm Fiserv that revealed that in 23 states, home values in nearly all metropolitan areas have risen over the past three years. Yes, you read that correctly. Risen.

Leading the way, apparently, is Texas. The Lone Star state showed gains in ALL of the 26 metro markets in the state over the past three years, ranging from Dallas's 2.8-percent rise to Odessa's incredible 32.5-percent jump, according to the article.

According to the report, states in the South, the Plains and in the non-coastal areas of the West have had price gains in most metro areas. "Middle America," some might call it. Or the "Heartlands."

The logic is that because those areas did not see home values shoot up in value during the real estate boom as much as other areas did, they have not seen the dramatic downside when the bubble burst.

So, except in "middle America" states where industry has suffered -- Detroit, for example -- and unemployment is high -- Ohio -- Joe Six-Pack has not seen the price of his home fall the way more cosmopolitan New Yorkers or sun-basking Miamians have.

According to the report, states that have a lot of undeveloped land did not have the run-up in prices during the boom that tighter areas had. For example, Odessa, Tex., had room to grow, so property values never went crazy even during the run-up. Manhattan, meanwhile, and places like Santa Monica, Calif., Portland, Ore., and Chicago had no room to add much more housing, which meant the existing housing became valuable.

Chicago -- more accurately, Illinois -- is a good example of this whole phenomenon. In its biggest city, land is tight, but in other parts of the state, there is plenty of undeveloped land. That meant that during the boom, prices in Chicago sky-rocketed but in other areas they didn't. And what went up faster and higher has come down faster and harder.

So the areas of the country that have the least volatility are doing OK right now, contrary to what you may hear and read every day.

This is another perfect example of "All real estate is local." There is no "national market." The national median price of a home really means nothing to you. You cannot let reports of the "national" real estate market affect your decisions regarding -- or your confidence in -- your own market.

Especially if you're Joe Six-Pack.

Closing part of the circle

Posted by Rob Minton
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In case you somehow missed it, President Obama last week signed an extension of the tax credit for first-time home buyers.

The credit that was set to expire on Nov. 30 will now be available to those who have an offer accepted by April 30 of next year and close by June 30. Buyers who haven't owned a home in the past three years are eligible for a credit of 10 percent of the home's purchase price, up to $8,000.

What's interesting, though, is that the bill that carried this extension for first-timers also has a provision for "move-up" homeowners. Anybody who has lived in their home for five years will get a tax credit of up to $6,500 if they purchase a home of greater value.

Why is this new provision included? Well, because while somewhat successful, the original first-time buyers credit didn't have all the economic effect lawmakers and those in the real estate industry would have liked it to have.

One criticism was that of about 1.4 million Americans who qualified for the first run of the credit, only about 350,000 homes were purchased by those who wouldn't have bought had it not been for the tax credit. Sure, that's a 350,000-home reduction to the inventory glut of homes on the market we have -- but it's not enough of a dent to help the overall economy much.

This real estate problem in the U.S. is kind of a circle. The number of foreclosures that hit the market in the past couple of years helped sink prices. With sinking prices, more homeowners owed more on their homes than they were worth, which leads to more foreclosures. More foreclosures lead to more inventory, and more inventory leads to sinking prices.

On top of that, with credit tightening up, there were fewer buyers out there. More inventory with fewer buyers meant further pressure on prices. So the government, recognizing it had to do something with the real estate market in order to help the overall economy, set out to A. slow down foreclosures; and B. increase buyers while decreasing inventory.

And the tax credit helped bring buyers to the market, which in turn helped reduce inventory. THAT in turn, has helped prices finally start to stabilize. They are, in fact, creeping up in some markets.

What didn't happen, however, is the the full effect everybody was hoping for.

"It did not have the chain reaction impact it was supposed to," National Association of Realtors Chief Economist Lawrence Yun was quoted as saying in aCNN/Money article. "Instead, many first-timers turned to vacant, foreclosed or other distressed properties the sellers of which were unlikely to be move-up buyers."

So by extending a credit to current homeowners, the hope is that more people will enter the market and homes prices will further stabilize. The thinking goes that as home prices stabilize -- beyond the lower end of the market -- more consumers should be more confident in their spending, which will further stabilize the overall economy.

So the effort has been made to further close the circle that is the real estate market. Will it work? Only time will tell, but trying to involve more people in that circle could be a big step.

A harsh investing lesson

Posted by Rob Minton
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I've written about it before, both on this blog and in the Income for Life Members-only Newsletter, but it bears repeating again.

Focus on investments you control.

The lesson was reinforced by the whole Bernie Madoff ponzi scheme that got so much attention, and, unfortunately, it comes to light again with the collapse of an Idaho company called DBSI Inc.

According to an article in the Minneapolis Star Tribune, DBSI has filed for bankruptcy, leaving thousands of investors likely empty-handed.

The company apparently specialized in commercial properties, getting investors to put up cash for part-ownership in properties and "guaranteeing" a rate of return.

This sort of real estate investment appeals to investors and would-be investors because it's passive. This company promised a return of 6 to 10 percent, according to the article, without the investors' involvement in the property. The lure of passive real estate returns enticed approximately 8,000 investors nationwide into handing money over to DBSI, the article said.

The company got around securities regulations issues by structuring the investments as something called "tenants in common,"  or TICs. From the article:

"TICs, the little-known investment that proved DBSI's downfall, involved selling little pieces of commercial property to lots of investors. A single office building, for example, could be owned by 20 or more individuals, each of whom would receive a deed for their percentage. DBSI would buy the property and flip it to the TIC investors at a markup, from 20 to 40 percent."

The company would hire a management firm to operate the property, and investors would just sit back an collect checks. Seems a nice setup if you're the investor.

However, the company guaranteed the investors' monthly payments, regardless of the properties performance. That should immediately raise a red flag -- no business, no investment can keep paying profits regardless of its revenue. How did the company keep paying its investors? Apparently with money it received from new investors -- which makes it little more than a Ponzi scheme itself.

Now, I'm not saying that all companies that do this are crooks. Or that it's always bad to invest in property that others manage, creating passive income for you. But this company, apparently, sold these investors pieces of property without disclosing risk, according to the article, and that's the key thing.

In any investment, there is always risk.

Yes, this company seems to have taken the money of unsuspecting investors, including some who were counting on the income for retirement. Shameful. And, yes, this company looks to have exploited a loophole with the TIC structure that helped them avoid securities regulations when, in effect, they were selling securities.

But there is still a lesson for the investor: Be wary of investments that you don't control.

If something seems too good to be true, it probably is. There aren't such things as "guaranteed" real estate investments. You don't want to deal with companies that don't disclose that there are risks. You want to steer clear of anybody promising you a return no matter how many vacancies the property incurs. According to the article, the company bragged that no investor ever lost money.

Steer clear.

It sucks that there are companies who continue to dupe investors. It sucks that it gives reputable real estate companies a bad name. It sucks that so many people who cling to the idea of truly passive real estate investment just hand over their hard-earned money.

But it serves as another lesson for investors.